Managing the risks

Published Thursday 1 February 2007 12:00 am

Manufacturers used to pride themselves on how much of their finished product they made themselves. In the early days of the motor industry, car-makers even grew their own rubber to be sure of having sufficient tyres.

But manufacturing today is as much about managing a supply chain as making things yourself. In fact, in some sectors such as computers it is becoming the exception rather than the rule for a manufacturer to actually make a component itself, in its own factory.

The opening up of world markets with the recent World Trade Organisation agreement has given fresh impetus to globalisation. Essentially, if an item can be mass-produced and a sufficient number stuffed inside a 40-foot shipping container, then it can almost certainly be made more cheaply in an emerging country like China or Brazil and shipped to the end consumer in the West.

It’s also beginning to be true of some of the more unwieldy consumer goods. Wolfram Schmid, director for industry and product marketing for the automotive sector at enterprise software specialist Infor – the world’s third largest in its field – says that car-making is one area that is fast becoming an emerging country industry, with the major OEMs rushing to get set up in China, India and other parts of the Asia-Pacific region. China made more vehicles than Germany this year, he says.

In East Europe, wage costs are typically a fifth of Western European levels and taxes are much lower, so it’s not hard to understand why there is so much excess production capacity in the west and why some countries in the East are forecast to almost double their car output in the next few years.

But the car industry is not alone. To a greater or lesser extent all major industries like electronics, chemicals, consumer packaged goods and even publishing operate across national frontiers. Industries have also borrowed concepts from each other. Vendor Managed Inventory (VMI), though widely used in many spheres of manufacturing, was actually a chemical industry invention, says Schmid.

Globalisation is therefore almost an imperative in manufacturing, but managing complex supply chains over such long distances is difficult and requires specialist tools. ‘Business processes that weren’t so important in the past have become much more so now,’ asserts Schmid.

The longer your supply lines, the more uncertain your supply chain will become. One way of coping is to simply stuff the supply chain with more inventory, but before you do that, consider the capabilities of global track and trace systems to keep tabs on shipments right from origin to final delivery, he argues. ‘The more information you have, the more inventory you can take out of your supply chain,’ he says.

The complete picture But to operate effectively as a global manufacturer, you need a very good handle on not only your complete landed cost, but also your internal process costs. ‘You also need to consider whether your processes are stable enough and whether you can rely on the data your supplier is sending you,’ adds Schmid.

A proper supply chain management system is essential for anyone involved in global manufacturing, he argues, and ideally it should operate over the internet. ‘When you go further back down the supply chain, you find that suppliers’ ERP systems are either poor or non-existent. What we at Infor can do is offer a proven solution over the Web; in fact, internet communication with your supply chain is very important.’

Though a necessary step on the road to the connected worldwide manufacturing enterprise, the EDI-based systems of an earlier era – that is, ten years ago – now look hopelessly outmoded and ineffective. Today’s software is infinitely more sophisticated and can even cope with different languages. In fact, the internet was a necessary precondition for globalisation.

Steve Keifer, vice president for product and industry marketing at business-to-business e-commerce solutions company GXS, says that in the early days companies simply looked to cut costs by offshore manufacturing, but have since refined their strategies. ‘It’s very difficult to predict consumer demand six to eight weeks out. One way of dealing with it is to limit the number of options available to different customers, or to have buffer stocks, but that could mean having too much stock or missing market opportunities. But I think firms are now moving to a multistage model where maybe they’ll make, say, five to ten basic phone handsets, but then use postponement or multistage models for the product completion stage.’

There are few goods that do not lend themselves to such an approach, he says, provided that they are designed from scratch with the supply chain in mind. The computer industry pioneered postponement, but now anything from sweaters to plasma TV screens can use similar techniques.

At the same time, manufacturers are swapping components and assemblies more and using contract manufacturing to a much greater extent. The latter has long been a feature of car manufacturing, but the lessons have likewise been learned by other sectors.

True, it can be hard for companies that pride themselves on engineering excellence to decide to outsource, but manufacturing today is as much about managing supply networks as it is about making things yourself.

GXS specialises in linking the different components of the widely scattered global supply chain together, though Steve Keifer admits that while it is easy to talk the theory, only a relatively small number of companies have truly achieved nirvana so far. The barriers are not so much technological as ones of trust, willingness to make investments and even company culture.

What is interesting is that online supplier exchanges, which seemed to promise much in Europe and the West a few years ago, but then largely faded, have emerged as an important weapon in the armoury of Chinese and other developing world suppliers. Another importantfactor has been the growth of brokers who can help smaller and medium sized companies locate suppliers in developing countries.

Peter Gerrard, supply chain practitioner at the Manufacturing Institute in the UK, says that increased inventory is generally seen as ‘the downside of globalisation’ but everything depends on individual circumstances – the goods involved, the economies of scale (if any) – and whether it’s possible to use strategic hubs, pointing out: ‘There are now a lot of third-party hubs available as well, especially around Europe, provided by the large forwarding companies.’

Part prices vs inventory Against the perceived cost of more inventory, companies must balance lower piece part prices – in some cases, dramatically so – ‘which can be a compelling argument.’

Technology can help in improving visibility of products on the high seas, perhaps helping to reduce the tendency of people to stuff the supply chain with excess inventory ‘just in case’. ‘One of the most inherent issues we find is the human one, putting elements of safety in’, says Gerrard. ‘It all stems from lack of confidence in the supply chain. So systems might address the major issue which we come across day after day – people making decisions, outside of company policy. And it happens right across the supply chain.’

Better forecasting might be the answer, but for many manufacturers forecasting leaves a lot to be desired, with maybe only 50 per cent, or lower, accuracy.

The answer might lie in more flexibility in the manufacturing process, but then again that can be easier said than done.

‘Supply chain isn’t simple,’ says Gerrard. ‘A lot goes on outside the boundaries of the business, and it’s not so easy to get your hands on it.’ This is particularly true of smaller firms, who are often lower down their suppliers’ priority list than, say, Ford or Samsung.

‘In supply chain, you have to keep your sights on the fundamentals – responsiveness, suppliers that can be relied on, quality and cost.’ Sometimes, you may have to be brutally honest – the customer of a specialist machinery manufacturer may be happier – though not necessarily happy, per se – to have the apparatus installed two weeks late than for quality to be substandard.

Peter Gerrard deals with manufacturing firms of all sizes across the north-west of the UK, though they are predominantly small and medium-sized enterprises (SMEs). Some are moving towards setting up a global supply chain. ‘In some cases, that’s not to bring cheap product back and add value to it in the UK, but can be because they want to manufacture in India or China for the local market there.’

Another factor in globalisation is the trend for large firms to move overseas and drag their supply chain and suppliers with them. ‘But in general, we don’t see any particular trend in terms of company, product or commodity, and it’s big companies and small ones.’

General rulesBut there are some general rules that anyone considering outsourcing would do well to follow. Bear in mind that if quality problems do arise, your supplier could be a very long way away. ‘It’s often important to have a presence there, in the early stages, to monitor any problems.’ If a repetitive fault is found when the first containerload lands in Europe, it could well be repeated in the following 30 consignments which are, of course, already in transit. ‘And if you can’t monitor things yourself, there are companies that offer it as a service,’ says Gerrard.

James Hurrell, business development director at DHL Exel Supply Chain, points out that globalisation hascoincided with an explosion in product lines and consumer expectation. He prefers the term ‘fit’ rather than ‘lean’ when applied to supply chains and says that it’s essential that the risks of globalisation are fully understood before venturing offshore. That said, the advantages of high growth local markets, low manufacturing and overhead costs and, quite possibly, reduced tax, are very tempting.

‘There are risks, like longer lead times, longer distances and immature infrastructure.’ An often overlooked issue is the lack of international supply chain experience among many companies, along with overseas regulations, language and cultural barriers.

He has a long list of horror stories of offshoring going wrong including unreliable suppliers, cost over-runs, manufacturing faults (very likely as a result of linguistic or cultural misunderstandings) replicated thousands or tens of thousands of times or even suppliers being caught using child labour.

However, there are steps that companies can take to ensure that they don’t get caught out. For a start, it’s helpful to think of the process as not simply finding a cheap overseas supplier, but as ‘product transfer’, explains Hurrell. ‘It’s a matter of transferring your manufacturing expertise to your partner, and it needs a lot of attention to detail. You may have to do a lot of hand-holding in the early stages.’

Formal quality processes are also a must. ‘If you end up reworking tens of thousands of items, it can get expensive.’ Inventory optimisation, too, takes on a whole new focus in the long-haul supply chain. According to a report by management consultants, McKinsey, customers in all sectors serviced from Asia are let down by shortages of the right product 40 per cent more often than world best practice. And this is in spite of inventory levels that are often 30 per cent higher than the world benchmark.

‘You’re placing orders further out, and for larger quantities, so you are increasing risk. To minimise it, you need people with inventory optimisation skills, and you need to invest in the right decision tools. ERP tools are designed for this.’ It’s vital to find the right logistics partner, says Hurrell.

The stretching of the supply chain is well illustrated by the proportion of supply chain costs attributable to transport. In 1987, transport accounted for only 33 per cent of the total, with warehousing, inventory and admin making up the rest. In 2004, the proportion was 57 per cent.

It’s also vital to link sales and operations planning with supply chain planning. Not enough companies have truly got a grip on their forecasting and it’s not unusual to find sales, manufacturing and supply chain each working to completely different predictions of future demand.

Experience countsThe need to move fast is responsible for a lot of the mistakes that companies make, says Hurrell. ‘But we do have a lot of experience, which we can translate into best practice. We can advise, and we can also execute, and we even have our own software – though software should never be seen as a magic bullet for problems caused by people or culture.’

Nowadays, it’s not just the big firms that have to think globally – it’s the small and medium sized enterprises too, usually because they are suppliers to the larger companies. Bodo Fritsche, managing director of SCM Solutions, Infor’s certified partner for implementing SyteLine and APS, is midway through an implementation of a SyteLine 7 solution hosted in Wales by WaspIT. ‘The world has changed; companies, even small and medium-sized ones, have many manufacturing sites, mostly in low-cost countries.’

The customer is Freshtex, a German-based company which ‘distresses’ jeans made by some of the big-name high street brands, ready for sale to today’s picky, fashion-conscious youngsters. This is a surprisingly complex and labour intensive process, and keeping track, not only of the quantities of garments being produced but, of quality standards, is a time-consuming process, especially as virtually all the work is done in low-cost countries where IT infrastructure is often lacking. Hosted systems can also be designed to cope with indifferent internet connections.

Global enterprises are increasingly moving from locallyinstalled IT solutions to hosted operations, which are more robust, can be offered on a ‘pay-per-use’ basis and which do not need much, if any, local IT expertise to keep them running. It’s also easier to standardise processes across the enterprise.

With systems unified, ‘it is then easier to evaluate whether, for example, a jeans scraping operation in one factory is comparable to that in another.’